Lawyers prepare for 'driverless M&A' as smart contract era dawns

The nation's top law firms are braced for disruption as "smart contract" technology threatens thousands of legal jobs and lawyers' role intermediating commercial negotiations and disputes is automated by computers.

One of the country's biggest law firms, Allens, sent a report to its clients on Friday afternoon admitting that lawyers' business model of profiting from an absence of trust in companies transacting with each is under threat from trust being coded into computers via distributed ledger technology, also known as blockchain.

Blockchain refers to new database technology where information is shared across a network of users who each hold a full and updated copy of the records.

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"Smart contracts" are an application on the blockchain, referring to computer protocols which verify and execute the terms of a contract, removing the need for humans to monitor compliance and enforcement.

​"For almost 200 years, our own business has been built on the basis that people need to transact but often lack the trust to rely on a handshake alone," Allens said.

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"In essence, we help organisations do business in the absence of trust – we design governance structures, we draft and negotiate contracts, and sometimes, if things go pear-shaped, we litigate.

"So when a new technology comes along that creates trust through computers – distributed ledger technology, also known as blockchain – is it going to be potentially disruptive ...

"While we have previously seen technology upend certain areas of our business, it is unprecedented for a technological development to cast such stark light on the future of the legal profession."

Gilbert + Tobin managing partner Danny Gilbert says disruptive change to law firms is inevitable and they will get smaller as lawyers are put out of jobs by automation of their role as a trusted adviser. Louise Kennerley

Gilbert+Tobin managing partner Danny Gilbert said disruptive change to law firms is inevitable and they will get smaller as lawyers are put out of jobs by automation of their role as a trusted adviser.

"Legal services and legal products have been driven by the human mind and the human hand, and we're about to see a fundamental change in that. We have driverless cars, we have robots doing surgery and we will have driverless M&A," he said.

"You will have fewer, smaller law firms at the top of the pyramid and I think that blockchain and smart contracting will have a very large role in further commoditising legal products."

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Henry Davis York partner Matthew McMillan said smart contracts are currently being used to digitise business rules but may soon move to codify legal agreements.

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"We are seeing a greater level of sophistication around the conditional logic that can be built into the blockchain and the very real possibility that code could be used to articulate verify and execute an agreement between two parties in place of traditional contractual arrangements," he said.

Banks have been investigating the application of blockchain in a variety of use cases, including international payments and trading financial product, which requires smart contracts to be developed to underpin such transactions.

In March, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp were part of a global group of banks in the R3 CEV consortium that executed smart contracts on five test blockchains in order to facilitate issuance, secondary trading and redemption of commercial paper.

Global banks and their legal advisers are now experimenting with new "coded" versions of the standard derivative documentation issued by the International Swaps and Derivatives Association to prepare for a world where derivatives are traded over blockchains.

How smart contracts work. BBVA

King & Wood Mallesons partner Scott Farrell, one of the leading legal experts in Australia on derivatives, was in London last week to advise financial services clients on smart contracts.

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Early applications would come in financial markets transactions which are suitable for some level of self-execution, he said. Smart contract and distributed ledger technology is currently taking up about half the time of his 10 person financial markets and systems expert team in the fintech practice.

"It feels like it's coming faster than we certainly would have thought a few years ago," he said.

Emma Weston, a former lawyer at the Australian Wheat Board and now a grain grower, has founded a start-up called Full Profile, which has been investigating how blockchain can solve entrenched agricultural industry issues, including removing counterparty or credit risk away from growers by putting grain sales contracts onto the blockchain.

Full Profile has already coded contracts onto HyperLedger and is preparing for a real trial at the wheat and barley harvest in October.

"We can use code to execute priorities, so parties will no longer need to register security interest over assets because priority payments can be embedded in smart contracts," Ms Weston said.

Lawyers don't expect their role to disappear completely any time soon but lawyer skills are changing.

Mr Gilbert, who also sits on the board of National Australia Bank, says: "The bright line between who is a lawyer and who is not a lawyer and what that means is fast disappearing. It will mean fewer lawyers in the process chain – but I think the role of trusted adviser will become more important.

"You will have fewer, smaller law firms at the top of the pyramid and I think that blockchain and smart contracting will have a very large role in further commoditising legal products."

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Lawyers are working through a variety of issues to bring smart contracts into reality. Mr Farrell said lawyers need to recognise contracts can have a "dual life-cycle".

"Most of the time, when it is 'business-as-usual', the path a contract takes can lend itself to expression in computation code," he said. "However, at the other times, when the unexpected happens, human judgment and discretion will become crucial."

ASIC chairman Greg Medcraft recently suggested that smart contracts might need to include a "kill switch" to stop their ability to self-execute in times of stress.

Banks and regulators are also debating what sort of window a regulator should have, given blockchains may contain information that is commercially sensitive.

Lawyers also say a speed hump to implementation will be the willingness of company boards to rely on new blockchain infrastructure.

An early test of this will be the board of the ASX, which is considering using a blockchain developed by Digital Asset Holdings to replace the equity market's clearing and settlement systems.

James Eyers writes on banking, fintech and technology. Based in our Sydney newsroom, James is a former Legal Affairs and Capital editor for the Financial Review Connect with James on Twitter. Email James at jeyers@afr.com.au

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